Anthony Ostler - SVP, IR Joseph Hooley - Chairman & CEO Mike Bell - EVP & CFO.

Glenn Schorr - Evercore Ken Usdin - Jefferies Brennan Hawken - UBS Jim Mitchell - Buckingham Research Alex Blostein - Goldman Sachs Mike Mayo - CLSA Brian Bedell - Deutsche Bank Marty Mosby - Vining Sparks Geoffrey Elliott - Autonomous Research Gerard Cassidy - RBC Brian Kleinhanzl - KBW Betsy Graseck - Morgan Stanley Jeff Harte - Sandler O'Neill.

Good morning, and welcome to State Street Corporation's Fourth Quarter of 2016 Earnings Conference Call and Webcast. Today's discussion is being broadcast live on State Street's website at investors.statestreet.com. This conference call is also being recorded for replay. State Street's conference call is copyrighted and all rights are reserved.

This call may not be recorded for rebroadcast or distribution, in whole one part, without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street website. Now, I would like to introduce Anthony Ostler, Senior Vice President of Investor Relations at State Street..

Good morning and thank you all for joining us. On our call today, our Chairman and CEO, Jay Hooley, will speak first. Then, Mike Bell, our CFO, who will take you through our fourth quarter and full year 2016 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com.

Afterwards, we'll be happy to take questions. During the Q&A, please limit your questions to two questions and then re-queue. Before we get started, I would like to remind you that today's presentation will include operating basis and other measures presented on a non-GAAP basis.

Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our 4Q '16 slide presentation. In addition, today's presentation will contain forward-looking statements.

Actual results may differ materially from those statements due to a variety of important factors, such as those factors referenced in our discussion today; in our 4Q '16 slide presentation under the heading Forward-Looking Statements; and in our SEC filings, including the Risk Factors section of our 2015 Form 10-K.

Our forward-looking statements speak only as of today, and we disclaim any obligation to update them, even if our views change. Now, let me turn it over to Jay..

Thanks, Anthony. Good morning, everyone. In reviewing our fourth quarter and full year 2016 results, I want to reinforce that our performance reflects the strength of our business and our commitment to advancing key strategic priorities that supports State Streets growth.

I'm pleased with our 2016 performance, our major accomplishments and the substantial progress we made to address strategic priorities.

In a challenging year, we stayed focused on our client needs, invested in new products and solutions including the acquisition of GE Asset Management, accelerated the pace of State Street Beacon digitization initiatives and achieved positive fee operating leverage for the full year, excluding the impact of the acceleration of deferred compensation expense in 4Q '16.

As I just mentioned, we recorded a compensation expense in fourth quarter '16 reflecting the elimination of the service requirement from the churns of our outstanding deferred cash awards.

This accelerated expense will give us the flexibility to improve the mix of cash in equity in our incentive compensation and our organization in future years, which will improve recruitment and retention of talent. Mike will take you through the details of this in a few minutes. Now, if I refer you to Slide number 5 on the slide deck.

I'll walk you through some of our key achievements this past year. We made advances on our strategic priority to digitize the Company through States Street Beacon delivering tangible service improvement benefits to clients.

By making advances in our goal of digitizing end-to-end, we're leveraging our strength as a middle and back office provider to deliver integrated solutions that improve the data, speed and overall service experience to our clients.

We're investing in solutions to deliver client value across all of our businesses, including the data and analytics to help clients comply with SEC modernization. We're also delivering data GX's capabilities to support our asset on our clients as they in source asset management. We also continue to drive growth from our core franchise.

We recorded net asset servicing wins of approximately 1.4 trillion for the year, including a 180 billion in the fourth quarter, reflecting strong growth with significant participation from Europe. Many of the large wins in 2016 that we highlighted to be represent clients consolidating the relationship with State Street.

For example in the fourth quarter, we expanded our relationship with Allianz Global Investors that extends their existing service relationship into a strategic role of partnership to deliver a broad spectrum of global investment servicing solutions, including custody and accounting services.

As a result of a decision to the versified providers, Blackrock will move a portion of their assets, largely common trust funds, currently with State Street to another service provider.

State Street remains a significant service provider to Blackrock and the transition will not be fully complete until 2018 and represents just over $1 trillion in assets. In our total new business yet to be installed at quarter end was just over 440 billion.

In our SSgA asset management business, overall we experience net flows of 16 billion during the fourth quarter.

In our ETF business, we have 36 billion in fourth quarter 2016 net inflows and 52 billion full year 2016 net inflows, which partially reflects traditional fourth quarter seasonality into SPY, our S&P 500 ETF, but also reflects continuous investment in our ETF product portfolio and distribution.

SSgA also finished 2016 with approximately 46 billion in assets under management across our target date strategies, a nearly 50% increase in 2015. We continue to invest in developing products and services that will enable us to meet client needs and drive differentiation.

Recent examples include expansion of the suite of environmental, social and governance or ESG investment products at SSgA. We recently launched Currenex X2, a next generation institutional foreign exchange trading platform with enhanced capabilities to help our clients' trade more rapidly and with greater functionality.

And our investment in blockchain distributed ledger application trials to seek to automate or improve the accuracy and processing speed of some of our more complex transactions such as syndicated loans, securities lending and collateral management.

We remain committed to expense control, as reflected by our full year positive fee operating leverage of 51 basis points for 2016 versus 2015, excluding the effects of the fourth quarter accelerated deferred compensation expense. And through State Street Beacon, we achieve approximately a 175 million an annual pretax expense savings.

And during 2016 through share repurchases and common share dividends, we returned just over 1.9 billion of capital to common shareholders. I want to go over up four strategic priorities for 2017 that we have led out for you on Slide 6.

These are underway now built upon our momentum coming out of 2016 and support our long-term growth and transformation process into a digital leader and financial services.

The priorities include advancing our digital leadership through State Street Beacon, continuing to drive growth from our core franchise, continuing to invest in new products and solutions and achieving our financial goals including generating positive fee operating leverage and continuing to return capital to shareholders.

Before I turn the call over to Mike, I want to welcome Eric Aboaf, who will be moving into the CFO role by early March. Eric joined us in December and is here with us today, but will not a speaking role in today's call. Eric will be speaking in the first quarter call on April 26th.

I'd also like to take a moment to thank Mike Bell for all of his work supporting the firm and our key initiatives. Now, I would like to turn the call over to Mike who will review our financial performance for the fourth quarter as well as our outlook for 2017, and following that Mike and I will be available to answer your questions.

Mike?.

Thank you, Jay, and good morning everyone. This morning, I'll start my review of our fourth quarter 2016 and full year 2016 results on Slide 7. Slide 7 highlights two notable items that impacted 4Q '16 and full year 2016 GAAP and operating basis results. First, we recorded tax benefits amounting to a total of $0.54 of earnings per share.

This includes a $145 million associated with the designation of certain of our foreign earnings as indefinitely invested overseas based upon our review of our need for capital liquidity in future investment. The income tax benefits also include a $66 million tax benefit attributable to incremental foreign tax credits and a foreign affiliate tax loss.

Second, as Jay mentioned, we accelerated the expense associated with outstanding deferred cash incentive compensation awards to our employees below the level of Executive Vice President are removing the continued service requirement associated with these existing deferred cash awards.

The schedule of the patents of these existing awards has not changed. The impact of this acceleration increased 4Q '16 expenses by approximately $249 million. The expense that would otherwise have been associated with these cash-settled incentive compensation awards will no longer be reflected in future periods.

The acceleration of the expense is expected to financially allow us to increase the immediate cash component of the incentive compensation in future periods relative to the mix in our awards in the recent years.

Importantly, we expect the expense impact of increasing the mix of cash in 2017 incentive awards will approximately offset the going-forward effects of the 4Q '16 acceleration in 2017. Now, turn to Slide 8 in the slide presentation for a summary of our operating basis results for full year 2016 and 4Q '16.

2016 results included a slow start to the year for U.S. markets and lower average daily values for international equity markets throughout the year. We also saw client redemptions in hedge fund business and other unfavorable asset mix changes. Despite these headwinds, full year 2016 EPS increased approximately 8% and ROE increased to 11.1%.

This includes the impact of the fourth quarter notable items. Excluding the 4Q '16 expense associated with the acceleration of deferred cash incentive compensation and the 4Q '16 tax benefits, 2016 full year EPS increased 5% and ROE increased slightly. Our 2016 pretax margin of 27.1% decreased relative to 2015.

Nevertheless excluding the 4Q '16 expense associated with the acceleration deferred cash incentive compensation and the impact of the acquired GE Asset Management business, the 2016 pretax margin increased approximately 60 basis points to 29.7%.

Turning now 4Q '16, EPS of a $1.48 increased from $1.21 in the year ago quarter and increased from a $1.35 in 3Q '16. As I mentioned earlier 4Q '16 EPS includes a net $0.13 benefit associated with the notable items. On the capital front in 4Q '16, we declared a common stock dividend of $0.38 per share and purchase $325 million of our common stock.

Moving to Slide 9, we've got the highlight that excluding the expense associated with the acceleration of deferred cash awards and the impact of the acquired GE business, we demonstrated continued progress in managing expenses for full year 2016, resulting in 51 basis points of positive fee operating leverage.

Please turn to Slide 10 and 11, and I'll briefly review 4Q '16 operating basis fee revenue. Compared to 4Q '15, the stronger U.S. dollar negatively impacted operating basis fee revenue with a corresponding benefit to total expense of $27 million.

On a constant currency basis and excluding the impact associated with the acquired GE business, 4Q '16 fee revenues increased by approximately 4% relative to 4Q '15. Specifically servicing fees increased reflecting new business across our servicing lines, partially offset by the impact of the stronger U.S.

dollar, client redemptions in the hedge fund business and the non-favorable asset mix change. Servicing fees decreased from 3Q '16 primarily reflecting the impact of the stronger U.S. dollar, as new business was approximately offset by hedge fund out loads and an unfavorable asset mix change.

Management fees increased from 4Q '15 and excluding the impact of currency translation and the acquired GE business, management fees were up $2 million or 8% primary driven by the elimination of money market fee waivers, higher equity markets and strong ETF flows partially offset by outflows in cash and sovereign funds.

Foreign exchange creating revenue increased from 4Q '15 and 3Q '16 reflecting higher volatility and client related volumes. Securities finance revenue increased from 4Q '15 primarily reflecting growth in enhanced custody partially offset by lower agency revenue.

Processing fees and other revenue decreased from 4Q '15 and 3Q '16 reflecting unfavorable valuation adjustments, which include the unfavorable impact of higher FX swap cost and lower revenue from joint ventures, partially offset by higher revenue associated with tax advantaged investments.

Moving to Slide 12, net interest revenue increased from 4Q '15 primarily reflecting higher market interest rates in the U.S., higher than normal discrete security prepayments of approximately $8 million and disciplined liability pricing. Now turn to Slide 13 to review 4Q '16 operating basis expenses.

Notably expense control continued in 4Q '16, excluding the expense associated with the acceleration of deferred cash incentive compensation, total expense decreased from 3Q '16, compared to the year ago quarter and excluding the expense associated with the acceleration of deferred cash incentive compensation and the GE acquisition, expenses increased less than 1% primarily reflecting strong progress on State Street Beacon effective management of our other operating expenses and the benefit of the U.S.

dollar. Let me now move to Slide 15 to review our capital highlights. Our capital ratios remained strong which has enabled us to deliver on a key priority of returning capital to shareholders through dividends and common stock repurchases.

Compared to September 30th, our common equity Tier 1 ratio decreased under the fully faced in standardized and advanced approach, primarily driven by a decrease in the after-tax, unrealized mark-to-market position within the AFS investment portfolio due to higher interest rates as well as reduction in the FX translation due to the stronger U.S.

dollar. The December 31th fully faced in supplementary leverage ratio at the corporation and the bank also decreased driven by a lower after-tax unrealized mark-to-market position within the AFS investment portfolio. Now coming briefly on the final TLAC rule that was issued in December become effective 1/1/19.

The final rule was largely in line with our prior expectations. Based on the external long-term debt requirements linked to our SLR, we currently estimate that we will need to issue incremental qualifying debt of approximately $2 billion.

Moving onto the next slide which we provide an update to our recently completed acquisition of GE Asset Management, the acquired GE Asset Management operations continue to support our plan to allocate capital to higher growth in return businesses.

In 4Q '16, these operations contributed $64 million in estimated operating basis revenue and 58 million in estimated operating basis expenses, excluding merger and integration expenses and financing costs.

We continue to expect the acquisition to be accretive to operating basis EPS and for revenue to exceed $270 million for the 12-month period beginning July 1, 2016. Importantly, as the integration progresses, we expect further revenue growth and expense synergies in the first half of 2017.

Moving to Slide 17, I'll update you on where we stand regarding our financial outlook. In 2017, we remained focused on key priorities for returning capital to shareholders, prudently managing expenses and executing on State Street Beacon as well as driving growth in our core franchise by delivering solutions to our clients.

Importantly in 2017, we're targeting positive fee operating leverage of 100 to 200 basis points. Supporting this target, we expect operating basis fee revenue to grow by 4% to 6% and would increase our expected 2017 net State Street Beacon operating basis savings to $140 million.

Turning to net interest revenue, we've developed two scenarios for 2017 operating basis NIR. The first scenario assumes market interest rates to remain at December 31 levels. Under this scenario, we expect operating basis NIR to be in the range of approximately $2.2 billion to $2.23 billion. The second scenario assumes U.S.

central bank hikes for 25 basis points in both March and September. Under this scenario, we expect full year 2017 operating basis NIR to be in the range of $2.27 billion and $2.3 billion. Notably 2017 NIR will also be impacted by the level of deposits, the deposits swap to U.S.

dollars and the associated expense will depend on further potential interest rate diversions between the respective currencies that we swapped. We currently expect our operating basis tax rate to be 30% to 32%, which does not assume any potential tax law changes due to the high level of uncertainty.

Let me briefly touch on 1Q '17 before turning to the last slide. While our first quarter 2017 revenue will be impacted by market conditions, we expect to generate positive fee operating leverage relative to 1Q '16 supported by our continued focus on expense management.

Also it's important to highlight that is in prior years, 1Q '17 compensation and employee benefits expense will be seasonally higher through the effect of the accounting treatment of equity compensation from retirement eligible employees as well as for payroll taxes and associated benefits.

We expect the incremental amount attributable to equity compensation for retirement eligible employees and payroll taxes in 1Q '17 to be in a range of $150 million to a $160 million compared to 122 million in 1Q '16. Moving to the last slide let me briefly review our 2017 balance sheet and capital outlook.

We expect the balance sheet to modestly decline in 2017, driven by lower client deposits and lower wholesale CD levels, with the corresponding decrease in the average earning assets of approximately 0% to 5% compared to the 4Q '16 average earning asset levels.

On the capital front, we have approximately $750 million remaining under our June 2016 common stock purchase program, and evolving regulatory and liquidity expectation mainly the issuances of both preferred shares and long-term debt in 2017.

In summary, despite the environmental headwinds that we've experienced, we're pleased with 4Q '16 and full year 2016 results, and believe we're well position to achieve our 2017 financial objectives. Now, let me turn the call back over to Jay..

Thanks Mike. Victoria that ends our prepared remarks, and we're now looking for to have you open the call to questions..

[Operator Instructions] Your first question comes from the line of Glenn Schorr with Evercore..

Just a couple of clarification questions on the Blackrock piece of business.

From what I understand, it was put up for RFP which to me means that you had a battle in your mind with, how do you think about the sending pretax margins versus retaining the business? So I didn't know if there is something you could tell us about the average fee rate for this business, I'm assuming it's lower because it’s a $1 trillion book.

And if there is anything you make about the common trust fund that would be the piece of business that would get move?.

Yes, let me just give you additional color on that Glenn, and I'll just wind back a little bit. Blackrock has been a client of State Streets from the very beginning 1988.

Their first funds and we've been fortunate to be joined at the hip with them through this successful journey of asset growth, and we think we've contributed somewhat to their success, both ETF and otherwise.

You know as they grew got to 5.5 trillion in assets, they came to us and say that they needed to consider some diversification, which while not our first choice we appreciate where they were coming from. So, the common trust funds are like mutual funds under a bank structure, there is nothing terribly special about them.

We had a relationship that considered that had custody and fund accounting associated with us with it. They told us they were going to move it to another provider, which I say well disappointed we appreciated where they were coming from. It's probably taken the year and half to do that. So they will do that over the course of the next year and half.

Importantly, we continue to be Blackrock service provider in their high growth ETF business, and we have a significant global relationship with Blackrock. So, I view it as a kind of a one-off adjustment for Blackrock to get better diversified, we're pleased and thrilled with the Blackrock relationship.

I think it will continue to grow, and we will grow with it. The other point that I was make which is I think an important point is that, in no way do I think it represents anything close to our trend.

In fact, the trend is actually than the other way, which is we actually announced this morning the expansion of the Allianz Global Investors relationship, which spans Europe, Asia-Pacific; and in the past year as we have announced several deals MetLife, Watson Capital, PIMCO Russell.

So, the overwhelming trend in the industry is to consolidate with fewer providers. For reasons of cost, it's more expensive for an asset manger to deal with multiple counter parties.

And probably even more importantly, the need to extract data for investment management compliance and risk management, and the more counter price you have them all complicated that is.

So, I would say in some, we're thrilled to be associated with the firm as successful as Blackrock, one of the consequences of that is when they grow so rapidly over a long period of time, they have chosen to make allocation adjustment of their service providers. We support that and we will make sure that the transition goes well.

We think Blackrock will continue to grow us and by no means do I view it as a trend more as a one-off situation..

I definitely appreciate all that. If we step outside the Blackrock piece, and if we were just talking about the quarter, I think probably the next question I would probably ask it would be some version of assets under custody of six but core servicing fees up too.

Is there anything unique in the quarter from market movements to show? Or is there just -- that’s just natural fee compression that the business has been doing from last 20 years?.

Yes, I would say, let me just explain it little bit and again I'll broaden it out past the quarter. I think, if you look at the quarter the things that were positive would be equity markets and new business. The things that slow the other way would be Mike mentioned, it's the strong U.S.

dollar and the downward pressure in international markets particularly emerging markets. So, those are the market effects. The other effects Glenn, which we continue to bring up, but the important is the way money flows within our client and subsequently with us, and you see inflows out of the emerging markets out of hedge funds.

Now, I believe that both of those they are cyclical trends and that we will see some reversion in both of those. And in the other flow trend which is more secular in my mind is the flow to ETF, and you have seen in the U.S. the stunning outflows to fund, inflows to ETF, we serviced over 60% of the ETF market.

So, net-net that’s a positive for us, but it's at a low fee rate. So, when you put all those things together, on the quarter you saw that numbers that you have suggested, but I'd also ask you to widen the lens and look over the past two or three years.

And if you look at, service fees as a percentage of AUCA has remained pretty consistent at 1.83, 1.84, so I think the -- if you look at the consistency overtime, all of them mix shifts and the effects of the environment, most of which I described, which leads need to the focus on profitability, both at a firm level and at a client level.

So, I think that is, that’s how we focus, we can't control the environment, nor can we control the flows. But I think we've been smart about migrating our business to the alternative and also the servicing of the ETF's. So, we think we capture all the buckets, but they will move around in time..

Your next question comes from the line of Ken Usdin with Jefferies..

I wanted to ask on the cost side to your comments about the living in fee operating leverage in 2017.

Just trying to understand, Mike your opening comments about, how this view change in the compensation plan works through that in terms of seemly adding to the underlying growth rate in 2017 because of that change? So, I guess if you kind to try to help us understand just the moving parts underneath that. There is the FX translation.

There is the ads from GE. There is the 140, and then there is some level of underlying inflation. Anyway of this understanding kind of what's happening underneath of surface would be really helpful? Thanks..

Okay. So, Ken, good morning. First, in terms of the compensation change, I think importantly Ken, we don’t expect there to be a net impact in 2017 from the compensation change that the Jay and I talked about here this morning.

So, the reason for that is that we expect in 2017 to increase our cash mix of incentive comp that would then be payable in February '18, but would be accrued as an expense throughout 2017.

And we expect net increase in that cash incentive comp mix, which is really driven by this stiff competition that we're dealing with in terms of competing for up for talent. We would expect that to be approximately offset by the lower amortization expense in 2017 from accelerating the expense of these cash, deferred cash incentive awards into 4Q '16.

So, the net-net, we would expect that change to be approximately flat in terms of the full year impact on 2017. In terms of your question on other ads and reductions to comp, I think you talked about the main once that I would highlight.

First of all obviously, we acquired the GE business, July 1, so next year we got a full year worth of expense there, and you can see from our disclosers the expenses associated with the acquired operations.

In addition, we've been adding a significant amount of new business obviously that comes with revenue, but it also there is a cost to service that new business would expect that to be in and in 2017.

We do expect that the there will be additional investments, not just in project Beacon, but also investments to support the long-term growth of the business. And we're focused on long-term shareholder value, not just the results for 2017.

And as you quickly pointed out, we expect the net savings from Beacon to reduce that where significantly we expect a 140 million of net savings from Beacon in 2017.

So the bottom line, Ken, without trying to focus precisely on the exact expense growth for the full year, what we're really riveted on is that 100 basis points to 200 basis points of positive fee operating leverage. Because again, we are going to have some wins, we expect that to add derivative growth, we need to service that.

But basically what we're really riveted on is creating another year of positive fee operating leverage that is actually higher than what we did in 2016. And that puts us on that trajectory to get to the 31% pretax profit margin for 2018..

Then just as the second question on capital pretty big movement in the unrealized gains and losses from the movement in rates, and you've mentioned perhaps you need to issue prefers.

I just want to ask, where is your comfort zone and where you want to sit on your access to capital ratios whether it's CET 1 Tier 1 leverage SLR? And would any changes in rates potentially way on the amount of capital return you would ask for as a result?.

First, I would point out that our capital ratios remain quite strong as we have wrapped up the year. First, looking at CET 1, you can see that we ended well above our 10% long-term target, and for the bank SLR are fully faced in the basis, we remain above the 6% bank SLR.

Now, Ken, one of the reasons that we have had cushion in our targets, so one of the reasons that we have had a target of 10% for CET 1 is to deal with the kind of short-term volatility that we saw in Q4. Both the mark-to-market hit from the higher interest rates, but also the hit to the CET 1 ratio from the stronger U.S.

dollar, and that’s exactly the reason that we have a cushion is to deal with that kind of short-term volatilities. So, the bottom line is we are comfortable with our spot rate capital ratios here, as we wrap the year. I think that the big uncertainty is around the fed stress test. We don’t have the scenarios yet.

So, we obviously don’t know, but I would expect that based on prior years that fed stress test will probably end up being our binding constraint. And depending upon exactly what that stress test looks like, press would be part of the overall menu of options that we would look at for 2017.

But I think it's way too early to speculate on what we might issue, and also how that would come into play with the capital return to common shareholders that we would also look at as part of that capital plan submission..

Your next question comes from the line of Brennan Hawken with UBS..

I just want a follow-up on Ken's question on comp.

So could you let us know my guess is that for the nearly 250 to 249 deferral charge that the majority just given the way usually those deferral profiles look the majority would have been hitting in '17? And so, could you conform that’s right, and if it's possible maybe quantify for us? And also are you removing all of the continued service requirements for the employee process that you led out? And does that raise any concerns? And then, I don’t hear a lot about competition for talent increasing, so could you may be square that with some of your comments and concerns about retention?.

Sure, so good morning Brennan, it's Mike. I'll start and see if Jay wants to add. First on your numerical question, the 249 million would have been amortized over three years. So, we're being amortized over '17, '18 and in '19. But you're absolutely right, because these are awards that we're originally granted '14, '15 and '16.

There is a disproportion impact on that 2017 of that 249 million that gets accelerated. So, whether or not get a precise numbers, but round numbers if you think about it as in the ballpark of 50% of that number, you wouldn't be far off.

And so basically think of it as, those expense savings for 2017 by not having the amortization expense, we expect to be approximately offset by accruing throughout 2017 for a higher cash mix for the cash awards that will then be paid out in February 2018 based on our performance in 2017.

So, that’s why I say net-net, I don’t expect there to be much of an impact in 2017 from the change.

Obviously, when you get to the outer years, ultimately, there would be expense savings because the awards that will be issuing in February of 2018, and particular we'll have less deferred more cash, so therefore less expense ultimately in the outer years, but probably no impact in 2017.

All on your question on the continued service requirements, importantly, Brennan, a couple of things, first this only applies to the deferred cash awards. It is not applied to the deferred equity awards that have been issued previously.

And the deferred equity awards, it's obviously different for different people but tend to be higher, quite a bit higher actually than the deferred cash. So, no, we're not concerned about that having a significant impact on employee turnover. As a result of that is the equity award that people would be walking away from remain quite significant.

And I would also would add that the, this doesn't have any impact to our Executive Vice President populations, so the top call it 70 people are not impacted by any of this, it's that pieces is carved out. And then lastly in terms of your point on talent, we continue to see stiff competition for top talent, which is really why we concluded.

We needed to make this change now. What's happened Brennan is, we've become a competitive outlier here as the market has basically shifted to a higher percentage of cash over the last several years. So, our mix became an outlier and basically we concluded that this is the time to make that change..

Okay, that’s all really helpful color Mike. Hopefully, the trends in competition for talent and trust banks are going to plead over to investment banks here soon. The other question would be on your interest rate guidance. So, very helpful that you laid that that up for us, thank you.

If we do end up giving, getting maybe three hikes instead of the two in your upside scenario, how should we think about that impacting NII? My guess would be it would be a little bit less than addition from the midpoint, using the midpoint as a guide, just given beta and a shift higher to higher betas on your deposit base as we higher in rates.

Is that right or should we think about it differently?.

I think that’s very fair Brennan. The first rate increase that little over a year ago now accrued very highly to our benefit, this last hike in December as well as the first hike in, actually the first two hikes in 2017.

We expect to be pretty significantly accretive to us, but we do expect as rates rise and ideally ultimately get back to more like long-term averages that more of that would be shared in terms of higher liability pricing, but that it would be still be net-net accretive to us.

So, your specific question on the third hike in 2017 obviously would largely depend upon the timing of that hike. But I think about it is round numbers that could be another 10 million to 15 million per quarter, depending upon exactly the timing of that third hike versus the other two..

Your next question comes from the line of Jim Mitchell with Buckingham Research..

Maybe we could talk little bit about the tax rate going forward it's just a lot of moving parts sticking with all the tax credits and with the contemplation of tax reform? How do we think that I guess first your GAAP tax rate including the credits on go forward basis? And how do you think about the risk of losing those credits versus where the tax rate goes? That would be helpful..

Good morning, it's Mike. First, there is tremendous mean really substantial uncertainty around where all these tax law changes are going. And I think importantly Jim, it's the details rather than the headlines they were going to be very important.

So, just as a couple of examples, it's particularly unclear at this point how potential changes would apply to financial services company. Talk about border tax or lack of deduction for interest expense in those. This kind of things is very unclear what that would be in terms of financial services firms in particular.

So, at this point I really wouldn’t speculate on the broader picture. In terms of your specific question around tax invasion investments, again the devil will be in the details.

It is possible that the tax invasion that since we have had a lot of successful over the last several years, become incrementally less valuable in tax rate environment or in environment where there is less tax credits for the alternative energy in particular.

I feel positive that the existing investments that we have do have contractual protections to protect in terms of near term cash flow, but again I think this is uncertain situation and really there will be a lot of devil in that details as proposals when we get flushed out..

And how do we think about GAAP tax rate on a go forward basis?.

Again, I just think it's completely speculated. It will depend upon the full….

Not excluding any tax changes, I mean just….

I would expect that the, again takeaway the onetime benefits that we saw in Q4, but borrowing any tax change I would model it similar to what we saw in 2016. Again importantly exclude the Q4 tax benefits that we singled out in the release and then my prepared remarks..

And then may be just one last, other question on the Blackrock follow-up.

And is there a way to think about the fee rate of that? And I understand obviously you guys announce this morning about 450 billion, I think is that incremental wins? And I guess when we think about your guidance this year that inclusive of the Blackrock and the new win this morning.

Just may be some further clarification would be great?.

Sure, Jim, I'll start and see if Jay wants to add or add it. But the, first, we really don’t get into details about specific client arrangements, just, that would be a very bad practice. But it is fair to conclude that Blackrock as well as the recent wins are anticipated in the 4% to 6% in the key operating leverage goals that we laid out for 2017.

Importantly, as Jay indicated, we don’t expect Blackrock to have a material effect into a beginning in the second half of 2017. So, as Jay said, this is going to spill into 2018 as well. So, we expect that to take awhile to get picked up in run rate..

Yes, Jim. The only think I would add is that, in the same way we talked about the stickiness of this business when somebody exits. It takes a fairly protracted period at time and so the effect on revenue will phase in over, my guess is the year and half or so..

Your next question comes from the line of Alex Blostein with Goldman Sachs..

Just picking up on the last question, so just need another clarification, I guess around Blackrock.

Will you guys win a sizable mandate obviously it often comes with a lot of expense associated with it? So we can take a guess on our revenue impact, but is there any expense relived that you could get on the back of that $1 trillion leaving?.

Sure, I think the good news is that, as I mention, we booked $1 trillion for this year. We've got 440 billion that’s still rolling in. These are resources that were redeploying, so I don’t see much in the way stranded cost here given our expectation for continue growth.

Is that way your question was Alex?.

Yes, just again like at the end of the day the people are trying to figure out the impact on earnings that is probably not fair to assume a 100% incremental margin on the loss revenue?.

Correct, not at all..

And then just shifting gears a bit back to the NIR discussion. So, I know you guys talked about the balance should be down about 0% to 5%.

Is that again something that you're trying to do practically meaning shrink the size of the balance sheet? Or is that just kind what you generally expect with higher interest rates? And a clarification on $2 billion, I am assuming it's in the NIR guidance for 2017?.

Let me answer the real easy one first. Yes, the TLAC is included in the NIR outlook, Alex that we talked about. On your question on the reduction in the balance sheet, it's really a combination of the two factors that you described. First of all, we do expect to further reduce wholesale CD balances in 2017, that’s been part of our plan all along.

So, I would -- I think that is on track and I would expect that to take round numbers 5 billion out of the balance sheet by the end of 2017.

In addition, we do expect up to call a 10 billion of client deposits to come off, some of that we expect to come off naturally as the fed fund rate continues to increase, and they find alternative homes for that investment balance.

But some of that is proactively looking to further reduce access deposits particularly in all the locations outside the U.S. and in particular EMEA would be an example where we are looking to further reduce access deposits..

The next question comes from the line of Mike Mayo with CLSA..

So assuming we're willing to accept your premise that the loss of the $1 trillion does not reflect a trend, it happens from time to time. You mentioned the 1.4 trillion of wins in 2016, you have a backlog.

So, let's just accept that for this discussion, but still it raises the question, are you guys just in some ferocious price competition? I mean, did you lose this on price, I mean if this is the world's worst oligopoly? Is this just additional evidence of that?.

No, I don’t believe and you'd have to ask Blackrock, I guess. It is nearly a matter of us growing so big together and then having the need to introduce another supplier. Purest stuff was that I mean and I think that go to was the common trust funds, not the ETF.

So, I think it was a rational move for them, and as I say not something we chose, but I understand their rational when you get to the 5.5 trillion. So, I would say it's much more reflective of the diversification strategy of Blackrock..

I mean did you try to keep the business and it's not new that Blackrock is big I mean why now?.

I think it's been an ongoing discussion with Blackrock on this point, and they chose this book of business to diversify and that’s their call..

And on Slide 17, when you give see guidance for 2017 of 4% to 6%, does that reflect the loss Blackrock business or would that be more of a 2018 impact?.

I think it will phase in Mike. My guess is through the second half of '17, we will see a little bit and then in '18, we will continue to drift in. But so, yes, it certainly reflects any impact of Blackrock..

And then last question, you continue to give targets for fee operating leverage, but not for operating leverage for the firm as a whole.

Don’t your clients pay you in compensating balances and which rates going up? Would you think about changing that target?.

Yes, we came to that target just to isolate the net interest revenue from the things that we control. We certainly get paid in balances which create net interest revenue, and I think this year depending on the scenario you pick, net interest revenue might grow in line with core revenue.

And therefore, we would transition over to something that looks like operating leverage generally. And if NIR is going more rapidly, we would expect the wider operating leverage target..

And Mike just to add to that I mean we continue to establish as an objective getting to a 31% pretax margin in 2018, obviously that’s all in as well, so that is not changed from what the targets we communicated the year and half ago..

And Mike Bell, just one last comment, it's your last call I guess.

As you look back, what would you say, hey, this is really good accomplishment that you achieved? And what one thing that you didn’t get done that you hope the firm gets done?.

That’s an interesting question. I would say that I feel best about the capital management discipline that we've had as an overall firm, but also applying at the business and the client level, Mike is what I feel best about.

And I would say that in terms of work that still needs to get done that I'm sure that Eric will have a thoroughly enjoyable time dealing with the regulatory issues. I mean we still a have lot of wood to chop in that in that area. And we'd love to gotten all of that done before I left. I think that would still remain in chop..

Your next question comes from the line of Brian Bedell with Deutsche Bank..

Jay, just not to beat the dead horse on Blackrock here, but can you can talk about what you're still doing for Blackrock? Obviously through the iShares franchise whether that’s intact I think that wasn't inherited from the deal in 2007? And if you can comment on any other types of business, and then clearly the mix shift with this, which shift more towards ETF and you've mentioned obviously that's a secular trend.

Can you talk a little bit about the profit dynamics of service in ETF versus mutual funds? I understand its lower revenue, but what extent you put the offset in front?.

Yes, happy to pick that up. As I mentioned, the Blackrock relationship is longstanding and significant, it's global and encompasses the ETF's, many of their mutual fund products and their institutional products all over the world. So, we cover most things. This common trust fund was a just one sleeve of that, but very comprehensive global.

And also tightly integrated from a standpoint of back office some middle office integration with a lad and so, it's an extensive and valued relationship.

With regard to the mix shift and as you rightly point out from package products in the way of fund into ETF, we do have a lower unit of revenue on an ETF, but profitability is quite similar to what you find in their traditional fund structure.

Which is why you see a little bit of a, to my earlier comment, which is why, you see the service fee per AEU, CA having downward pressure, but shouldn't effect margin. And I guess the other point I would make is that, as in most of our businesses, the more scale you have, the more margin you should create.

And so with the ETF business growing as rapidly as it is, and with thus invested in pretty significant and I would say differentiated technology, we would expect, we have ability to scale and improve that margin over time, as EPS grow, which we think they will continue too..

Great, and then may be just on the guidance for the fees and expenses, the positive operating leverage. I see it sounds like you're saying that January market conditions are the basis for the fee outlook for 2017.

But can you comment on, your view on hedge fund, redemption, I know you said that impacted the few rates in 4Q, so to what extent are you baking that in for coming in '17 and I know 4% to 6% guidance?.

So, Brian, it's Mike. First, there are any number of factors that are going to impact a fee revenue growth in 2017, and so you are picking on the couple of them, but I mean there are whole host of other issues that we could talk about.

I mean not the least of which is the mix shift that we saw in 2016 worked against us in terms of emerging markets versus developed markets. That’s another wild card for 2017.

But to answer your questions directly, yes, we were assuming that in that 4% to 6% range where market conditions are here in January obviously that means upside, if there is a continued grown up in the equity markets, downside if it doesn’t. And in the hedge funds, it's difficult to project that beyond the near term.

I mean in the near term we have continued to see pressure, and we thought about that in, as we develop the four to six. But as Jay indicated earlier, we expect that really to be more of a cyclical of phenomenon rather than a secular trend.

So, over the long term, we would expect the mix impact that we had in 2016 to longer term ultimately reverse and to see more growth in emerging markets versus developed markets, and also additional growth in the hedge fund servicing business..

Okay and then just mix of the 4% to 6% between the revenue lines, is that the 4% to 6% also a good assumption for the servicing fees? And then obviously the other ancillary in that range or is your big difference between those two?.

I really can't go one by one. But I would point out that SSgA we expect additional growth because you need to annualize the GE Asset Management revenues. So that provides a discreet boost of between 1.5% and 2% to total full year fee revenue for 2017 versus 2016 just giving the additional six months of that.

And so I would expect that the SSgA revenues would grow faster than the others. But I mean the trading environment is unclear. On finance, I think we will see continued growth in enhance custody but the market conditions around the agency business are really up unknown area of uncertainty.

It will be what it would be but in aggregate we feel comfortable that 4% to 6% is fair enough work..

Your next question comes from the line of Marty Mosby of Vining Sparks..

I wanted to ask a little bit about in NII, and so when you are looking at the 6% increase from fourth quarter of '15 to fourth quarter '16 that only included really one rate hike. The static only has 1% to 3% growth over the next year which would also include an additional rate hike that we just got in last December.

So, it seems like we are assuming that the deposit beta is runoff the deposits is accelerating pretty rapidly as you move just to the second rate hike versus what we have seen over the last year.

So just I was wondering if you could reconcile those two and then looking at the 6% it looks still on the next rand of raising still a little conservative there?.

Well, Marty, again, there are a lot of different factors that are going to coming to play here, a couple of specific data points; you might want to think about for your modeling.

First of all, if you're new 4Q '16 is your starting point, I would strongly suggest that you take the 8 million of discreet prepayments out of there; we do not expect that to be the one rate of steady securities prepayments so to the course of 2017. So I think the 547 million in Q4 and back out the eight and you get the 539.

And so if didn’t look at the 539 compared to our static scenario, there is an up lift of $70 million that basically reflects the Q4, the December rate hike, that we all experienced.

So would characterize that $70 million of accretion to be significant benefit and something that we're very pleased with and its driven by not just market conditions but the fact that we feel good, it will focused on the liability pricing actions as well, which makes that as accretive as it is.

The other factor that I'd urge you to think about here is that, situation in Europe remains unhelpful and in particular the combination of the negative central bank rates, coupled with significant quantitative easing program, means that we continue to see a grind in net interest revenue for the non-U.S. dollar our portfolio.

That’s baked into the thinking for 2017 as well obviously it would look be a happier picture, if all we're focused on was U.S..

And then, Jay, second question was, and always hit this Blackrock thing, couple different ways, but the only thing that I was curious about was given the all new initiative to be able to report on flows that you're seeing. Obviously not by customer but look at aggregate types of statistics.

As Blackrock could be a large part of that aggregate, is this the versification in a sense of, foreseeing or real thinking about the new product that you have and then there is not wanting to be too big our reflection in that index?.

Interesting question, Marty. No, I think that with 28ish trillion, the statistical, the need for data from a statistical reliability standpoint a $1 trillion wouldn't affect that one way the other.

It always it in anyway and my discussions with Blackrock in there calculation, and I think everybody feels quite comfortable that we aggregate information that it's all masked and that we have more than enough to create statistical examples and Blackrock wouldn’t effect that..

Your next question comes from the line of Geoffrey Elliott with Autonomous Research..

It's sounded like the sort of diversification initiative the Blackrock is undertaking, that sounded quite on unusual from what you were saying, it was not right as much more common, so someone could focus on just a single provider?.

Very unusual, but it is also not a lot of $5.5 trillion around even. So, yes, unusual though. If you think about in my history here, it's quite unusual..

What give you comfort that if this partnership between Blackrock and JPMorgan turn out to be successful. You don’t end up losing more Blackrock assets down the line. What can you tell us to give us some kind of their….

You could say that about any relationship and I would say we continue invest in the business, we as a specialty provider I would put us up against anybody anytime with regard to our back office middle office, digitization or global footprint, consistent systems.

But having said that, we don’t sit back so I referenced earlier Geoffrey the work we have done and the ETF platform. They are first continuing to invest to create the discernable differences and the eyes of the authorized participants and the clients.

So we view it as our job to get better every day whether it's the way service to client the way we create new products the way we anticipate new demands from our clients and regulations so that’s what we do.

That’s what we worry about and think about and so I have all the confidence in the world that we will continue to be a value provider to Blackrock and all of the other clients..

And are there any particular points in time we should focus on as how long are those all the Blackrock assets going to be tied up with you before they come up again and someone else can compete for them?.

No, you should be think about it at the point and time it's just like any other relationship that we have they have terms to them but at end of the day if you are providing value people have little reason not to continue to do business with you..

The next question comes from the line Gerard Cassidy with RBC..

Mike, you talked about in the processing fees and other revenue line that there is an unfavorable valuation adjustment that affected the number and the number in quarter look like it was negative 65 million versus a positive to 111 million a year earlier.

Can you share with us what was the valuation adjustment and how much was that?.

Sure, Gerard. First of all, I would urge you to include the tax equivalent adjustment in there. So on operating basis of processing fees and other, on operating basis 121 million in the quarter, but what I was referencing the most significant of the adjustments in the quarter was we had approximately 20 million of unfavorable FX swap cost.

So, this is the cost as an example, this would be the cost of converting deposits that we get in Europe over to U.S. dollars to be able to invest and here in the U.S. between the fed funds hike and the continued negative conditions in Europe, not to mention the quantitative easing that the European Central Bank has been doing.

We have seen FX swap cost get more and more expensive then we saw in particular a lot of volatility in December around in the FX swap markets that further increased the cost of those swaps.

And normally, we do get hedge accounting for that so normally that is a negative to net interest revenue, what we saw in the quarter is that we had fewer of those trades they qualified for hedge accounting with some very technical rules around exactly what it take to get hedge accounting. So as a result that ended up in other fee revenue.

As I said that it was negative 20 million in the quarter. We had a couple of other things as well, we have these investments in various joint ventures, that was a negative outlier in the quarter that, run numbers about negative 9 million and it's firmly a small positive, so that was a headwind.

And then we hit some other smaller valuation issues but so its, it was one of those that seemed like a little bit of a perfect storm depressing the other fees for the quarter..

Thank you. And then as a follow-up, obviously, you guys always give us the color on the first quarter equity compensation expense that pops up as well as payroll taxes. I understand that it is a new accounting rules that they are going to put into place this year regarding the tax impact of share based compensation.

Should we expect that impact to your numbers in 2017 due to the change in the accounting?.

We don’t expect that to be material Gerard. I mean obviously, it depends exactly on market conditions and what would happen to our stock, but we don’t expect that they have a material impact. If it does, I'm sure Eric will talk about it in future quarters..

Your next question comes from the line of Brian Kleinhanzl with KBW..

I guess I have a quick question on the NIR this quarter may be not so much on the quarters is well but, what did you see for deposit of the quarter, what's the most recent hedge funds move and was there also any impacts from the European debt securities that you had said were causing margin pressure before?.

Sure, Brian, it's Mike. First, I rather not give out the specifics on the deposit beta, but suffice to say that the majority of that debt funds hike us accrued to our benefit and that's -- sorry, it was accretive, not a huge amount in the quarter because it was so late in the quarter.

But in terms of the benefit, in terms of full year 2017, that benefit is significant income and in terms of your question on Europe the circumstances there have not changed.

The combination of the negative central bank balances at the negative central bank rates at the ECD coupled with the depressed credit spreads and continue to leave this in this position of this grind, its pushing down that interest revenue, obviously that’s all impacted, that’s all reflected in the expectations, the outlook that we gave you for full year 2017.

We're not expecting that situation to get better over the course of 2017. So, it's really unchanged..

And 'on your fee revenue growth assumptions, the 46% for 2017, think about it, I know you quite a think about it fee rates, direct from the fee rates, I mean if we were to think about it, do you assuming fee rates continue to decline, like you saw declines in asset management, as you say is they flat going forward?.

As I said to one of the earlier questions, I mean there any host of things that could impact fee revenue in 2017. I really think about it Brian more as a mix issue as oppose to a fee rate issue in particular. Again, we don’t believe that the cyclical mix change out of emerging markets in hedge funds in 2016 is a long-term secular trend.

We think that will bounce back exactly when it does is unclear, but if that get improved then I would expect that to actually be a positive in terms of mix change. And so, it's contemplated as part of the range that we gave you the 4% to 6%. That it's there is a whole set of different scenarios that could place us a different spot in the range..

Your next question comes from the line of Betsy Graseck with Morgan Stanley..

I had just a question longer term on, how you are thinking about pricing for potential deals and it has to do with the fact that rates are rising? So the value with the soft dollars going up and the mix of revenues that you generated from your business activities, so I am wondering if that factor is into your thinking how you are thinking about CE growth as well?.

I'll take that, Betsy. This is Jay. You are right and we hope that continues I think between rates and where you are going to see a little more action of foreign exchange side we have a lot of confidence in the growth of our enhanced custody so those revenue streams I think are probably tending in a good way.

Some of those are more explosive and the conversation with the client with regard whether somebody is lending securities or doing a certain amount of trading. Some were settled and we try that consider all of it and looking at relationships overtime to make sure that they hurl certain profitability metrics for us.

So it doesn’t really changed it’s a mix gets more healthy. We would hope as we pointed out in our guidance around margin that we are able to extract more margins in time. And that’s a fact there are fee rates and also the Beacon driven efficiency..

Okay. And then just separately at your last Investor Day you talked and showed quite a bit around that data analytics keys of the offerings that you are investing in.

Just wanted to get a sense of client response take up rate, ability to charge for that’s part of the reason to pick you? Maybe just give us some color there?.

Yes, now it's I believe you have heard me say this probably too many times that is the future of this place, and clients pay us to settle trades and to calculate net asset values but increasingly the value as expressed in terms of how we can aggregate data pull data together for inside to support any number of these which they have.

We have at last count just I think its eight clients have hired us to do kind of a comprehensive aggregation of their data information of product we call data GX. That’s kind of foundation of products or is to be extent that a big client hires us to be the overall integrator of that data.

On the back of that we think there will be enormous analytics opportunities, not only with us but with others. So, I would say great progress on data GX.

And the demand is increasing pretty rapidly as people come to grips whether it’s a compliance service management need or the need to understand different aspects of their information from a standpoint of managing their portfolio for performance.

So, I would say off to a good start I think I say after good start, I say competitively, we think we allocates long before our competitors and we're quite optimistic about the trends..

Your next question comes from the line of Jeff Harte with Sandler O'Neill..

Just a couple for me. On the 2 billion of incremental qualifying debt to issue for TLAC, I want to make sure getting this right.

Should we be expecting an absolute increase in debt or 2 billion in other some currently outstanding issuances as could be replace less more favorable outstanding debt from TLAC?.

I do expect this Jeff to be incremental..

And then I was looking for a silver lining with large transfers as a way of custody assets.

I mean does that typically include termination payments or would there possibly some kind of short term revenue benefit from that larger outflow?.

No, not really, I mean I appreciate the silver lining was back to but, I think that there is a silver lining for me as that Blackrock is growing in the way is that, we'll grow through this I suspect in a short period of time..

Okay. And if I just been kind of on a bigger picture on the kind of importance of scale and servicing efficiency, I guess I might be getting at business mix as a servicing covers an awful lot of ground.

But can you help differentiate for me State Street from kind of some of the other providers that also have significant scale? And why when we look at a profitability we think State Street is going to be may be come out ahead of some of those competitors?.

Let me take that one Jeff, this is Jay. And I think that, if you look at the scale efficiencies in this business, they generally anchored around your core settlement and accounting activities, as well as some of the administration tax support.

And you know the efficiency comes out of initially your technology architecture and philosophy, one versus many systems and then it grows out of, I would say about the next process layer which is how thoughtful have you been about creating global processes, how advanced are you with regard to creating global standards of excellence and then ultimately which is, what our pursuit is with Beacon is digitizing all that, so you reduce the level of labor by a client technology.

And if that’s the mental model of how you optimize the efficiency out of a big scale processing business, I would say, we’re well ahead of most of the, if not all of the competitors from the stand point of our discipline of common systems, not a common systems but systems that we own and operate, so that we control.

The first phase of our IT and Ops transformation was largely a process and center of excellence move and then this digitization. This last phase is all around optimizing the core and extracting the data for other revenue opportunities.

And my visibility which is pretty good because this is the business we, and that were well ahead of our competitors, and I think that, if we continue invest at the right pace, I don’t see anybody catching up with us.

And the sooner we get to that state of fully digital being able to provide information in data upstream for our clients to me that’s the real prize in this business. So, I don’t think there is a magic formula for what to do, but I would say we are much further ahead in the execution of getting it done..

There are currently no further questions..

Victoria thanks and for those who are still online thanks for your attention. We look forward to talking to about our first quarter results on April 26th. Thank you..

Again, thank you for your participation. This concludes today's call. You may now disconnect..